tv Options Action CNBC May 11, 2012 5:00pm-5:30pm EDT
>> this is "options action." tonight, a whale of a trade. dan nathan has a trade on jpmorgan that can triple your money in one month that can turn diamonds pain into your yan. we will explain. call it a zinger. how would you like to buy zynga stock. it may not be farmville, but it is on the social media giant and show you how you can get paid too. why are the traders wading into the digital river? "options action" begins now.
>> world's largest equity options exchange. these are the traders here in new york's times square. jpmorgan is taken to the wood shed on the $2 billion loss. fitch downgrading the long-term credit rating and the stock is falling in the after hours. the question s is there a new best in breed in financials? let's give them the money and find out. dan, this is early similar to what happened not too long ago to another financial out there. >> it's an interesting point. when you think about goldman sachs, they came out of the crisis and goldman was reaching some precrisis levels in the stock in april of 2010 and then the sec makes these charges about this and all of a sudden the stock got slammed. there is the chart. the thing that's interesting to me t 4 less to do with the fundaments of goldman sacks and more into a pr war against the company and a sediment trade
stuck in there and since then, it never recovered. it had a lot of issues on that front on a pr front. >> before we get to david gregory who just spoke this afternoon, take a listen to what he had to say. >> there were structural risks -- >> apparently we don't have that. the regulators are looking into this. this gets to the point that goldman went through how it stuck there in the range. there were shoes that dropped and dropped and dropped. >> the thing about the regulatory look, they are trying to see whether or not they disclosed this at the appropriate time and whether this was something that should have come up sooner or later. that is undetermined. what's interesting to me is what's going on now with jpmorgan can have big implications for goldman sachs. they are about 32% of the revenues from fixed income and currency, sales and trading. if you have to think about what the forecast is, you have to say this can't be good from a
regulatory perspective. if they get affected, it has to be goldman. >> goldman sacks is taking advantage of outside customers. people who didn't know better and were relying on goldman's guidance and from all appearances, jpmorgan shot themselves in the foot. they lost the money and there is a huge difference as far as pr. i think jamie diamond is about as teflon as warren buffett. he can get away with this when a lot of people couldn't. >> that are remains to be seen. you will see this guy in front of congress and a lot of the same stuff we saw. to lay out the playbook right now, 24 hours after this revelation, i think it's way too soon. to me, again, we have been talking about this. this is a dicy time for these business models who have been staring down the face of the regulation. this hurts things a great deal. >> light was never able to go in
front of congress and say yes, we were stupid and it cost us money. lloyd had to hmm and haw and people should have known better. very different. >> the fact of the matter is jamie diamond said that yesterday in the conference call and the stock was down more than 9% at the close, the lows of the session. giving up 30 cents on the fitch downgrade. it is being whipped around. the question for a lost investors is not just do i invest in jpmorgan stock and my guess is that you would say no. that's besides the point. there was an interesting differentiation today. wells fargo and u.s. bank corp, they close the day nicely higher by like a percent apiece. do we make that differentlyiation? these are the less complicated banks out there. >> 100%. that's what i am alluding to. how do they make money? they will be pressured on the best mechanisms that they have to make profits. you obviously have to say okay, this is a concern for everybody
who makes money that way and everybody is in conventional lines of banking and they will be better bets. you will see a natural migration of risk assets from one type to another. it's not likely to sit there and say we should be allowed to do this business and here's why. it's hard for them to make that. >> to your point, it was by 10:30 in the morning when jpmorgan was making new lows. wells fargo was the largest and it doesn't have the same issues that big money would have. >> to that point, jamie diamond said what they did would not have violated the rule. i don't know how any regulation speaks to regulation and said that jpmorgan is like goldman sachs. >> sounds like you would be willing to take a flyer. >> it's a great stock. i would actually sell put spreads because implied volatility is up as much as 25%. we will have that discussion
later. >> you are on the opposite side. >> if you are looking out a few years and think in the mid 30s that it's a good long-term investment, have a ball. they will defend the stock and they have a big buy back in place. if it continues to go lower, it will be a bid for the stock. that being said, i am looking at it from a trading perspective and there is an opportunity to see it over the next month, not dissimilar from what we saw in 2010. i will define the risk. a nice pay out if i get another 8 to 10% move. >> for those of you new to the show, it's a strategy we use often and it's good to review the basics. this is a strategy where you buy and sell a lower put of the same expiration to reduce the costs. the goal is simple. you want it to strike to the put that you sold and that's how you make the most money. the profits are also capped. walk us through the trade. >> i am using a put spread and
jpmorgan doesn't have that high volatility like citigroup and bank of america, but because it was elevated i want to use it. when it was about 3720, i bought the june 3634 put spread for 50 cents. it's a $2 wide put spread. i bought it for $1 and another for 50 cents. it cost me 50 cents. that's the max risk. max gain is 1.50. on june expiration, i can make up to 1.50. below 34 i make the full 1.50. that's the trade i want to make and these guys will have a host of pr problems over the month or two and this is a good way to play it. >> i like the risk reward. risking 50 cents to have a trade worth $2. if you look at the way stocks perform when negative news comes out, a sharp decline and a lot of people catch them. this is a great company. there is a great value here.
what happens next? you start getting more and more news and people start to sell it off for a couple of days. when you don't have all the facts, sit there and try to purchase a stock after it had that. very often you will see another couple of days of declines and more facts come out. i think that this is a good risk way to make a bearish bet on the air. >> a long time since we had a divergence like this. with implied volatility, you have to buy spreads. you are likely to hit your head again. i disagree with dan because i think they are a great brand and will do well. >> some might be thinking i want to do a plan, but here's why you have to be careful about doing anything because of the components of this etf. just as jpmorgan was a major component, so was wells fargo. was the activity in this vehicle today? >> it was elevated all of
financials, jpmorgan more than any other. one of the things you have to deal with is index volatility will decline with the divergence. if one stock is going up and the other is going down, very little happens. if you are trying to get leverage, look at the risk-reward relationship. you are paying a quarter of the difference between the strikes. that's the kind of risk-reward we are looking for. >> that's a great point though. they showed the list and berkshire and wells fargo. they make up 15 to 17%. that was trading and down less than a percent at one point when they were down 9.5%. >> you want to know why they got in this? they forgot the most basic rule of all. stocks versus options. that can mean a whale of a loss and they carry unlimited risk. the put spread offers a 3-1 pay out and defines the risk to $50. no word on jamie diamond ado
adopting stocks versus options i'm sure a lot of them hope he doeses. >> one week away. the road show hit the west coast and julia boorstin has the latest. there is question at this point tonight as to whether or not the ipo will happen on friday. >> facebook came out and they spoke to us and said the sec has not signed off on the latest yet they can't confirm they will could and trade a week from today. there is no reason to think that the sec won't approve the final one and won't start trading in a week. they want to make sure they didn't make it sound like they were getting ahead of themselves. i wouldn't be surprised if it didn't happen a week from today. it has been a crazy day and mark zuckerberg is the three key executives at facebook that they left. they were followed by swarms of reporters and they are on the way to one on one meetings. they finished a q&a session of
about 200 investors fielding a lot of investors about mobile and also the advertising model in particular. what social ads are and how they work. investors were carrying the marked up s 1. about a dozen or dozen 1/2 said they want to buy in on the ipo and get in on the stock and they expected it to be oversubscribed. if it is as huge as many expect it could be, this could benefit the sector and could certainly open up the ipo market to more internet ipos. i want to bring in the linked in chart, the business networking that think of themselves as the business analogy and facebook. that is up 70%. linked in had a great run, but in contrast, groupon and zynga suffered. zing is is down about 20% year to date in part because it is so reliant on the facebook platform. they have been making motions to
diverse away from facebook. groupon, buying service and the deal a day is down 52%. one thing we need to keep in mind is a lot of investors said they invested in the other social media names to have exposure to the sector. the big question is, once they can combine with facebook itself, will they shift the investments to facebook away from the other companies? that's something to watch. we will have to see if they get a lift. i would expect that. back over to you. >> it's going to be a busy week. get some rest. as julia mentioned, will a successful facebook ipo give a boost to the names like a zynga and groupon and pan dora which has not done well after their debuts. what do you think? >> it wouldn't surprise me. i'm not sure how i feel about groupon. i don't see the link right there and linked in neither.
zynga on the other hand does have close ties to facebook. the mafia wars which is not a game i happen to play. >> really? i thought you were a fan of mafia wars. >> i am also not on facebook, but a lot of people who are on facebook are involved with games like mafia wars through facebook. there is a close connection between these two. it wouldn't surprise me if somebody thought maybe if zynga is due for a bounce, this might be the potential driver as people look for a way to play on facebook. if you won't get the allocation, no way to trade it now. maybe that's the only other way to make a play. >> do you think it gets a bounce off of the facebook ipo if it hasn't already? >> i have been watching it closely when facebook released one of the first s 1s and 15% had come from zynga, down from 19 a year. zynga has their own site in beta
and trying to get people off of facebook and playing farmville on their site and capture the revenues. the cams are very faddy. they are a fad. not fatty. >> phat, fat? >> fad. >> on my mind because i'm getting on a plane in a couple of hours. >> you better listen to the stewardess. >> she's a flight attendant. >> mike, you are bullish on zynga and expect a bounce at least. >> i could it could create support for the stock and could give it a boost. i don't like to look at the chart, but i will also tell you that the options market is expecting a heck of a lot out of zynga in light of this. they don't have earnings until july, biif you look at the prices of the dated options, these are jacked through the roof. we sometimes talk about implied moves on earnings, i would say there is an implied move on
zynga at about 10%. i would say i want to try to take advantage of that. >> mike is engaging in a simple strategy and selling a put. most are familiar with that, but selling a put is a common strategy for those of you looking to make a bullish play. you are moderately bullish and sell it out of the money and the put whose price is below where the strike is. you get paid for doing this, but there is a trade off and you must be willing to buy the stock at the price. think of this as an order where you get paid. it will up the margin. >> specifically i am looking at the june seventh puts. 765 when i was looking at that and you collect about 50 cents for the put. 7% of the stock price. if you stock declines below the strike, you may be forced to buy it. that would be about $6.5 and one of the reasons you might look to
do that if you are inclined to make a bullish bet is because of the way the chart looks. this is what i was talking about. i am not sure i want to give myself a cushion. if the stock is just supported for a month, i will take it and go home. >> would you bother with this? >> yeah, i think it could be a cute trade here. i don't see it -- i don't see it doing the options. >> unless you want to sell a put for the reasons mike said. i think if you want to take a shot for a week to the facebook ipo? >> it is not on facebook yet, but it could be soon. we are talking about stocks versus options. in hope of a successful ipo that will cost about $7. get a question? send us an e-mail? we will answer it on the on one web action on our web show and you will find a lot of educational material there as well. check it out.
here's what's coming up next. >> now that's a hot trade. colin carter made a bearish bet on chipotle. with the stock cooling off, they are in the money. will they hold out for more dinerro? time for pump up the volume. the sizzle index next week hawking software online. maybe the commerce company can help you out. the biggest client is none other than mr. softy himself and news of an extension powered the stock higher and they elevated the call volume and hopes they will send the stock to cloud nine. who sf st? more when "options action" returns.
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where options traders were company pumping up this week, at one point call volume was over nine times the averagedale volume. >> time for the upside call and we look at the winning options trades. my thought shares, looking a little bit bloated. bearish options and made 50%. here's how. >> on options action, there is one recipe for a tasty trade. risk less and make more. that's what colin did on the bearish bet on chi potly. the part about the shares were
too spicy. >> taking your chances by the launch and they wouldn't do it. >> the shorting in the stock is about as painful as eating ten of these. so to define the risk, they are between a 420 put and they might fall below that put strike price by more than the cost of the trade or below $404.50 by june expiration. 1550? this ain't a fancy french restaurant. show us how to do this for less. now we're cooking. to spend less from the june 390 strike put and completed his put spread. he did something better. he made making money easier and here's how. between the 1550 he spent buying one put and the 750 he collected
selling the other, mike cut the cost to just $8. now instead of meeting to fall below $404.50, he announced more than the $8 he spent on the trade or below $412 by june expiration. but there is a trade off and by selling that put, mike capped his gain to the difference between the strike of the put he bought and the strike of the put he sold. since the time of the trade, shares have simmered down, falling 6% and making colin carter a winner. now fans from cancun to taiwany are tuned in and they want to know one thing. what will they do now? before we answer that, let's see how much was made. if you short the chi potly stock, you would have made about 7%. it can be sold for $1200 and a return of 50%. carter got us into this name. he is off the dust on vacation
and he sent us this postcard. we are staying the course with cmg on the short side, having appreciated too far, too fast is $30 off the high of three weeks ago judged to a further downside risk. i wonder if all of them talk about trades. what do you do at this point? >> like the tacos and the trade and don't like the stock. i will stick with this one. you don't want to linger too long. it's falling through that right now because otherwise you would be paying decay. keep an eye on that. when the stock gets down, that will be a good opportunity to look at taking it off. >> hope you are having a great time. coming up, the final word from the options pits.